I was shocked to discover the subtle ways in which reputable banks overcharge their home loan customers and don’t bother informing them which is prohibited abroad as a deceptive lending practice for decades.
The first step for you is to find any online ’loan amortisation’ calculator.
You punch in your principal, interest, and tenure [assuming it has monthly ’reset’] to get a table showing your breakup of interest & principal for each EMI.
The first thing you’ll notice is that the breakup will rarely add up to the actual EMI you are paying.
It will always be less by a small amount e.g., Rs. 100 - 200 monthly which can really add up over the tenure of your loan.
Lets take a specific example:
HDFC Bank was offering a 9.5% loan for Rs. 30 L.
Suppose you chose Rs. 50 k as your EMI, they would revert with a tenure of 82 months.
Now when you choose a round number for your EMI, the banks are very happy to oblige since it can never equate to an EXACT number of months!
So there is a small rounding UP [but never down].
In the above example the actual EMI for 82 months comes to Rs. 49, 876/=
A site like 99 acres can help you with such a calculator or simply google another one.
https://99acres.com/property/home_finance.php?fn=ac
That’s an extra payment of Rs. 124 over 82 EMI = Rs. 10, 168/=
If that does not sound like a lot to be losing due to ’rounding’, then consider that its ONLY the base figure - you also have to take the interest cost into account @ 9.5%.
If you use DCF [discounted cash flow] from any website, you will get an actual amount of Rs. 14, 256/= approx. That’s 40% more due to interest charges!
Here’s is one ’annuity’ calculator I happend to use:
https://coolmath.com/calculators/calculator-annuity-1.html
The only problem is that you have to convert your tenure into years so 82 months = 6.8 years.
The next way is how they calculate the interest rates.
Your monthly interest can be simply your annual rate divided by 12 months.
Sounds fair doesn’t it?
However that actually increases your total interest paid since no loan is given at simple interest - they are all compounded.
Assuming a stated rate of 9.5%, the ’monthly’ comes to 0.79%
However if you compound this rate back over 12 months you get 9.92%
This is the REAL rate of interest you would be paying.
The correct monthly rate should have been 0.76% if you compounded it back.
See what a ’small’ difference of 0.03% makes!
For those of you who really like excel, here is the formula for calculating your correct monthly rate:
=(1+B1)^(1/12) - 1
where B1 is the annual interest rate advertised.
So apparently banks don’t have the sophistication to do correct math that we should have learned by class 9-10 ...
Amusingly enough this little simplification is NEVER done by any bank when it comes to paying you interest on any savings like FDs!
Then they ALWAYS take the trouble to compound the monthly rate from the annual interest or yield.
This little oversight will cost you in higher EMI.
The new amount would be Rs. 50, 490/= monthly @ 9.9% as opposed to Rs. 49, 875/= @ 9.5%
The difference of Rs. 615 monthly would add up over the years to Rs. 71 k over the entire tenure using a rate of 9.9%.
The correct tenure should be 81 months with the last emi being below half the usual or Rs. 19-20 k instead of 50 k.
You can build your own table in excel with monthly reset where you can specify
the annual interest [covert it to monthly compounded using the formula given above]
the principal or initial loan amount
3, the EMI you want to pay [must be more than the monthly interest!]
Now first calculate the interest for the current month based on the balance outstanding for the last month.
Then subtract this from your total EMI to get the amount of principal to be paid that month.
Reduce the principal paid from your total balance outstanding for this month.
Keep repeating each row until your balance goes to zero and tweak the last EMI so that you don’t overpay and have a negative balance.
This means your last pricipal payment should not exceed your loan balance outstanding from the prev month.
Also since no bank lends beyond 20 years, your tenure should not exceed 360 months [or rows in excel].
If it does, then you must select either a higher EMI or a lower loan amount to redo the calculations.